Tax Consequences for Record Jackpot Winner

The holder of a single ticket, sold in Lincoln, Nebraska, is the winner of the nation’s largest lottery jackpot ($365 million), according to the Associated Press. The winner had not yet come forward at the time of this writing.

“We have found…that they [large jackpot winners] tend to wait until they have sought legal counsel or financial counsel,” Jim Haynes, acting director of the Nebraska Lottery told the Associated Press.

Whoever the winner is, they will be sharing the wealth with Uncle Sam.

“The odds of winning the grand prize are less than one in 146 million, but it’s a sure bet that if you do win a big jackpot you’re going to also have a big tax bill, with more than one-third of your winnings going to the IRS,” says Mark Luscombe, JD, CPA and principal tax analyst for CCH, a Wolters Kluwer business, and a leading provider of tax law information and software.

Having picked the winning numbers (15, 17, 43, 44, and 48 with Powerball 29) and bought the winning ticket, the ticket holder who claims the prize has 60 days to decide whether to take a lump cash sum, estimated by CCH to about $177 million, or an annuity, which will pay out the full amount won, over a period of 29 years. At first glance, it may seem wise to choose the annuity, since taxes will be collected as the money is paid out and putting off taxes to future years is generally good advice. The exceptions, according to CCH, are if the winner is confident they can earn more on a lump sum, from which taxes have been subtracted, that the annuity will return, or if the winner believes that tax rates are going to increase over the next 30 years. Today’s highest tax bracket, 35 percent for taxable income of $336,550 or more for both individual and joint filers, is lower than it has been in previous years. If the winner chooses the lump sum payout, they will hand over approximately $62 million to the Internal Revenue Service (IRS) for tax year 2006, assuming their only income came from their winnings. State income taxes will also need to be taken out.

Regardless of whether the winner elects an annuity or a lump sum payout, if they invest part of their winnings they will owe federal income tax on the gains earned each year. If their investments don’t pay off, the losses can be used to offset gains and, in 2006, $3,000 of net capital losses can be used to offset other income, while any additional losses can be carried forward until the entire loss is used up, according to CCH. Fortunately, current capital gains tax rates are relatively low, with 15 percent being the maximum for 2006.

If the winner turns out to be someone who regularly purchases Lottery tickets or a gambler, they should also keep in mind that gambling losses are tax deductible, up to the amount of gambling winnings.

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